Predictive model for use in providing an equity release financial product

ABSTRACT

A predictive model for use in providing an equity release (reverse mortgage) financial product is disclosed. In at least some embodiments, a plurality of representative loans are created, wherein each loan can be characterized by a borrower type and a mortality table. A plurality of joint interest rate and house price scenarios are also created. Each of the representative loans can be run through each of the joint interest rate and house price scenarios to measure profitability metrics. The model can also be used to determine loan-to-value (LTV) ratios based on considerations including borrower age, loan volume sensitivity, a determined profit-maximizing LTV ratio, and geographic market considerations.

CROSS-REFERENCE TO RELATED APPLICATION

This application claims priority from co-pending, commonly-ownedprovisional patent application Ser. No. 60/803,527, filed May 31, 2006,the entire disclosure of which is incorporated herein by reference. Muchof what is disclosed herein is also disclosed in commonly ownedapplications Ser. No. 11/560,096, entitled, “Convertible Home-EquityBased Financial Product” and Ser. No. 11/560,122, entitled, “Method andApparatus for Providing a Home-Equity Based Line of Credit,” both ofwhich have been filed on even date herewith and both of which areincorporated herein by reference.

BACKGROUND

A mortgage is a traditional financial product that allows a person orpersons to finance or re-finance the purchase of a home. At least twoother traditional financial products allow a home owner to obtain fundsby mortgaging the value of his or her existing home, or at least theequity in the home. A home equity loan can be obtained from a financialinstitution by the home owner, who may be referred to by the financialinstitution as a “customer” or “borrower.” The customer takes out theloan and a lien is placed on the home by the financial institution sothat the loan is secured by the equity in the home. As with a mortgage,the borrower makes payments with interest to the financial institutionfor the life of the loan. The loan may be taken out as a lump sum, ormay be set up as a line of credit, where the borrower draws on the lineas money is needed. In the case of the line of credit, monthly paymentsare adjusted accordingly for the outstanding balance at any given time.The amount of the loan, or the size of the line of credit is calculatedas a percentage of the value of the equity in the borrower's home, andthis percentage is commonly referred to as the loan-to-value (LTV) ratioor percentage, or simply as the “LTV.”

Another vehicle, the reverse mortgage (RM), allows a borrower to drawupon the equity in his or her home without having to make any paymentsuntil the loan is terminated. A reverse mortgage product offered by afinancial institution is sometimes referred to as an “equity releaseproduct” and such a loan is sometimes referred to as an “equity releaseloan.” Typically, a reverse mortgage is set up as a line of credit whichis again calculated as a percentage of the value of the borrower's home,the LTV.

A reverse mortgage can be terminated by the death of all borrowers, saleof the home, non-residence of all borrowers for a period of 12 months,violation of home upkeep standards, or failure to pay insurance ortaxes. Although with some equity release products borrowers may chooseto make partial or full repayments of a reverse mortgage loan, in thetypical case, no payments are made, and the lending institution obtainsthe minimum of the net sale proceeds of the property and the loanbalance as “repayment” of the loan upon the death of the last of theborrowers, since reverse mortgages are typically non-recourse loans.Thus, underwriting criteria are based primarily on the property itselfand not on the credit worthiness of the borrower(s). However, a minimumage requirement for the borrowers is typically imposed. Examples ofspecific, known reverse mortgage products include the Home EquityConversion Mortgage (HECM) product insured by the United States FederalHousing Administration (FHA), and Fannie Mae's Home Keeper.

SUMMARY

Example embodiments of the present invention provide modeling techniquesthat can be used to evaluate an equity release product, sometimesreferred to as a reverse mortgage. Such an evaluation can be used todetermine profitability metrics, as well as loan characteristics such asloan-to-value (LTV) ratios for loans to be made as part of the product.

In at least some embodiments, a plurality of representative loans arecreated, wherein each loan characterized by a borrower type and amortality table. A plurality of joint interest rate and house pricescenarios are also created. In example embodiments, these loans andscenarios can be virtual in nature. That is, their characteristics aredefined so that a product or proposed product can be evaluated. Each ofat least some of the representative loans can be run through each of atleast some of the joint interest rate and house price scenarios tomeasure profitability metrics. The profitability metrics across theplurality of scenarios can then be aggregated to produce aggregatedprofitability metrics for the equity release product.

In example embodiments, the process of running representative loansthrough the various scenarios can include determining home prices, usinga utilization function for a representative loan to determine a drawamount, determining a rate of termination for a representative loan, andcalculating a distribution for a representative loan. In addition todetermining profitability metrics, a model according to exampleembodiments of the invention can be used to determine LTV ratios. Theseratios can be based on considerations including borrower age, loanvolume sensitivity, a determined profit-maximizing LTV ratio, andgeographic market considerations.

The modeling according to example embodiments of the invention can befacilitated by means of an instruction execution platform such as acomputer system executing an appropriate computer program product orcomputer program code instructions. In some embodiments, the informationdefining the various loans and scenarios, as well as mortality tables,borrower characteristics, and the like, can be stored in tables and/ordatabases and then read by software as the model is executing.

BRIEF DESCRIPTION OF THE DRAWINGS

FIGS. 1-5 are flowcharts that illustrate methods according to exampleembodiments of the present invention.

FIG. 6 is a system block diagram illustrating the operating environmentof example embodiments of the present invention.

DETAILED DESCRIPTION OF THE INVENTION

The following detailed description of embodiments refers to theaccompanying drawings, which illustrate specific embodiments of theinvention. Other embodiments having different structures and operationdo not depart from the scope of the present invention.

As will be appreciated by one of skill in the art, the present inventionmay be embodied as a method, system, computer program product, or acombination of the foregoing. Accordingly, the present invention maytake the form of a hardware embodiment, a software embodiment (includingfirmware, resident software, micro-code, etc.) or an embodimentcombining software and hardware aspects that may generally be referredto herein as a “system.” Furthermore, the present invention may take theform of a computer program product on a computer-usable storage mediumhaving computer-usable program code embodied in the medium.

Any suitable computer usable or computer readable medium may beutilized. The computer usable or computer readable medium may be, forexample but not limited to, an electronic, magnetic, optical,electromagnetic, infrared, or semiconductor system, apparatus, device,or propagation medium. More specific examples (a non-exhaustive list) ofthe computer readable medium would include the following: an electricalconnection having one or more wires, a portable computer diskette, ahard disk, a random access memory (RAM), a read-only memory (ROM), anerasable programmable read-only memory (EPROM or Flash memory), anoptical fiber, a portable compact disc read-only memory (CD-ROM), anoptical storage device, a transmission media such as those supportingthe Internet or an intranet, or a magnetic storage device. Note that thecomputer usable or computer readable medium could even be paper oranother suitable medium upon which the program is printed, as theprogram can be electronically captured, via, for instance, opticalscanning of the paper or other medium, then compiled, interpreted, orotherwise processed in a suitable manner, if necessary, and then storedin a computer memory.

In the context of this document, a computer usable or computer readablemedium may be any medium that can contain, store, communicate,propagate, or transport the program for use by or in connection with aninstruction execution system, platform, apparatus, or device. Thecomputer usable medium may include a propagated data signal with thecomputer-usable program code embodied therewith, either in baseband oras part of a carrier wave. The computer usable program code may betransmitted using any appropriate medium, including but not limited tothe Internet, wireline, optical fiber cable, radio frequency (RF) orother means.

Computer program code for carrying out operations of the presentinvention may be written in an object oriented, scripted or unscriptedprogramming language such as Java, Perl, Smalltalk, C++ or the like.However, the computer program code for carrying out operations of thepresent invention may also be written in conventional proceduralprogramming languages, such as the “C” programming language or similarprogramming languages.

The present invention is described below with reference to flowchartillustrations and/or block diagrams of methods, apparatus (systems) andcomputer program products according to embodiments of the invention. Itwill be understood that each block of the flowchart illustrations and/orblock diagrams, and combinations of blocks in the flowchartillustrations and/or block diagrams, can be implemented by computerprogram instructions, or may be human-performed unless otherwise stated.The computer program instructions may be provided to a processor of ageneral purpose computer, special purpose computer, or otherprogrammable data processing apparatus to produce a machine, such thatthe instructions, which execute via the processor of the computer orother programmable data processing apparatus, create means forimplementing the functions/acts specified in the flowchart and/or blockdiagram block or blocks.

The term “bank” and any similar terms are used herein in their broadestsense. Financial institutions that process transactions and documents ofthe types discussed can include stock brokerages, credit unions, andother types of institutions which are not strictly banks in thehistorical sense. The use of terms such as bank, “financialinstitution”, “lender”, or the like herein is meant to encompass allsuch possibilities. Also, the use of the term “home loan” is intended toencompass any and all traditional loans secured by the residence of theborrower including traditional mortgages, home equity loans, so-called“bridge” loans and home equity lines of credit.

FIG. 1 is a flowchart illustrating an example of an overall process,100, in which example embodiments of the invention might be used. Likemost flowcharts, the flowchart of FIG. 1 illustrates process 100 as aseries of process blocks. In the example of FIG. 1, a customer has anexisting relationship with a financial institution based on atraditional home loan, in this example, a home equity line-of-credit(HELOC), which is being serviced as shown at block 102. It can bepresumed for purposes of this example that the HELOC was set up inresponse to an application for such a loan, and that at the time of theapplication, a typical credit review was conducted. Finally, the HELOCin this example was closed with the normal paperwork, except that theproduct was set up with the customer so that the HELOC could beconverted to an equity release loan upon the customer's request. Aspreviously mentioned, it would be possible to have other events triggerthe conversion, for example, the customer reaching a specific age.

During the time when the HELOC shown in FIG. 1 is being administered atblock 102 the customer makes payments, including interest. A home loanproduct according to example embodiments of the invention can be set upso that the product allows borrowers to convert their HELOC to theequity release product with ease. The home loan product can bestructured such that borrowers will normally meet the general conversionrequirements mentioned below for minimum home equity and combined LTV.To stay with the current example, the HELOC can also be designed so thatborrowers can “fast-track” through the reverse mortgage applicationprocess if and when a borrower decides to convert the HELOC to a reversemortgage.

When conversion is triggered at block 104 of FIG. 1, a determination ismade by the financial institution at block 106 as to whether thecustomer meets the qualifications that are placed on the product. Inexample embodiments, the lender may require borrowers to be at least 62years old, and have a minimum contractually-defined percentage of equityin their home. The combined loan-to-value ratio (CLTV) for all the homeproducts that the borrower has at the financial institution might berequired to be below a pre-specified threshold. If the customer is notqualified for some reason, the HELOC continues at block 102, otherwisethe LTV, and any initial commitment amount, if different, are determinedat block 108.

It should be noted that with any reverse mortgage, whether or not it hasbeen granted as a converted product as described above, there is apossibility that the balance may rise above the value of the home. Attermination, the lender may only be able to claim an amount up to thevalue of the home at sale since the loan is typically non-recourse. Ifthe value of the home at sale exceeds the loan balances in such a case,the borrower or his/her heirs keep the excess proceeds from the sale. Ifthe loan balances exceed the value of the home at sale, the lender isforced to take a loss, which is the shortfall between the loan balancesand the sale proceeds. One way to mitigate the riskiness of a reversemortgage product is to obtain insurance to protect both the lender andborrower, and such insurance can be provided as a component of aconvertible product like that disclosed herein. Alternatively, afinancial institution can simply try to predict the likelihood of a lossfor a given proposed loan based on past experience. However, accordingto embodiments of the invention a predictive model can be used toquantify risks. In example embodiments, such a model projects theproduct's cash flows along a series of simulated house prices, interestrates and termination dates.

The model used at block 108 of FIG. 1 can be calibrated against acombination of historical price movements and market-based instruments.In addition to stochastic elements, the model can contain detailedexpense assumptions that reflect the costs incurred by the lender tooriginate service and terminate the loan. The model can also projectcash flows and its outputs can be used to determine overall productprofitability in a manner consistent with the lender's profitabilitymeasures. A more detailed example of the model is described in greaterdetail below with reference to FIGS. 2 and 3.

In the example process of FIG. 1, at conversion, borrowers can beoffered a choice for the interest rate structure of the equity releaseloan. The loan can be structured so that borrowers are able to switchbetween rate structures, possibly subject to switching fees andfrequency restrictions specified at origination. For example, ratestructure options that can be offered include a variable rate structure,where loan balances (withdrawals and financed fees) accrue interest atan adjustable rate and rate caps on annual and lifetime rate increasescan be specified at origination. Alternatively, loan balances can accrueat a fixed rate that is specified at the time of conversion. A hybridarrangement could also be offered, for example, one where a fixed rateof interest is used for a period of time, after which balances willaccrue interest at a variable rate.

The borrower's initial principal limit (the size of their line of creditat conversion) can be calculated as a percentage of the home value. Incases where the borrower has chosen some form of equity protection, theportion of the home value upon which the principal limit is based can bereduced accordingly. The repayment amount at termination will typicallybe the fair market value of home. If the equity release is provided as aline of credit, the allowed credit line can be calculated as apercentage of the home value that is based on the age of all borrowers,interest rate assumptions, the maximum loan amount allowed by thelender's policies, and any other appropriate factors determined by thelender.

Still referring to FIG. 1, the home equity loan is converted to areverse mortgage, or “equity release” loan at block 110. This conversionprocess can include documentation and reverse mortgage (RM) counseling.The product can be set up so that there is a low or no-documentationupon conversion characteristic, which would allow less information to bedetailed to the borrower, and may allow the same account number to bemaintained. At block 112 the conversion fees are determined andassessed, and can be drawn on the available balance. At block 114 theavailable funds and initial interest are calculated. These two blocksare often executed at the same time and could easily be reversed. Atconversion, the borrower's existing loan balances would be transferredto the equity release product and the borrower would stop making monthlypayments.

In the example process of FIG. 1, a required payment draw feature can beincluded to allow the credit line to be used by the lender for paymentof taxes, insurance, and upkeep costs or other fees and services relatedto the underlying property. This feature can be designed to mitigate therisk to the lender of borrowers not complying with their contractualobligations on property upkeep and tax and insurance payments. Subjectto any legal requirements, the payment draw feature can be presented toborrowers as either a necessity or an option. Pricing, procedures,rights, and obligations of all parties can be established and agreed atorigination.

Equity protection can also be provided as part of the equity releasedescribed above. In example embodiments, an equity protection featurecan provide borrowers with the option of setting aside a portion of theequity in their home to be protected against the bank lien. This portionof the equity would be unavailable for use as collateral. Attermination, the lender could only claim an amount up to the value ofthe home at sale minus the protected equity that is in effect.

With an example equity protection feature, at origination of theproduct, borrowers can be required to select an equity protection optionfrom a menu of options. If the borrower selects no equity protection, heor she will be offered a credit line that the lender calculates based onthe full amount of the home value. If the borrower elects to protectsome of the home value from the bank lien, the borrower can be offered acredit line that the lender calculates based on the home value minus anagreed percentage, or an agreed fixed dollar amount. The subtraction ofa fixed dollar amount will be applied whenever the credit line isre-assessed during the life of the loan. To simplify this option, anallowed range of values can be specified by the lender. With an optionto select a percentage of the home value to be protected from the banklien, an allowed range of percentages can be specified by the lender. Ifthe borrower selects this option, he or she will be offered a creditline that the lender calculates based on the home value minus the agreedpercentage of the home value. The subtraction of the percentage can alsobe applied whenever the credit line is re-assessed during the life ofthe loan.

Still referring to FIG. 1, at block 116, a customer selection of how thefunds are to be distributed is obtained, and processing then branches atblock 118 depending on that selection. Borrowers, at origination, can beoffered a number of choices for how they choose to withdraw moneyagainst the loan. The lender can specify any restrictions on the abilityof the borrower to switch the withdrawal method during the life of theloan. Withdrawal method options available to borrowers in this exampleinclude a lump sum option. With this option, at origination, theborrower takes a lump sum withdrawal of the entire available loanamount. A determination can be made at block 120 whether to provide aninvestment using these funds at block 122. This investment can be a CDladder, a fixed annuity, or a variable annuity. Note that these areexamples only. Other types of investments, such as a long term careinsurance policy, could be provided for the customer.

In the example process of FIG. 1, a borrower may also choose at block124 to use the lump sum proceeds to purchase a home, such as a secondhome or vacation home. If the borrower chooses this option, the loan issetup to provide the downpayment and no monthly payments are required asshown at block 126. In this example, the lender, at block 126, canspecify a distinct set of mortgage terms for borrowers who commit to usethe loan for a home purchase. The salient features of the loan whichdiffer from the standard reverse mortgage product in such an examplemight include a residency requirement and that the initial balance onthe loan will be equal to the purchase price of the home minus the downpayment. Interest can be made to accrue on the balance of the loan untila termination event occurs, and the loan can be set up to be anon-recourse loan. In such a case, the most the bank can ever recover isthe value of the home. At termination, the loan is due and payable. Ifthe home is sold, any proceeds above the amount of the loan go theborrower or the borrower's estate.

At block 128 of FIG. 1, if the borrower does not choose to set up anannuity or purchase a home, the lump sum is paid out, interest accrues,and payment is deferred. For all lump sum options, monitoring andmaintenance of the equity release loan commences as shown at block 130.

Returning to block 118 of FIG. 1, the borrower can choose to establish aline of credit at block 132 and can withdraw money at any time and inany amount up to the maximum line amount, or the borrower can choose toreceive scheduled payments over time. In either case, the payout isdrawn against available funds, interest accrues, and payment is deferredas shown at block 134. In this example, a borrower could also choose acombination of one of the lump sum options and one of thepayment-over-time options.

Still referring to FIG. 1, blocks 130, 136, 138, and 142 are, in atypical example, executed continuously and concurrently, as indicated bythe feedback arrows shown. At block 136, the loan with payouts over timecan be adjusted either periodically or upon borrower request or othertrigger event. This adjustment can be made via re-assessment, or a drawlimit step-up feature, both of which will be discussed in detail laterwith respect to FIGS. 4 and 5. Line size growth can also be accomplishedby periodically bringing the line of credit or scheduled payments intoalignment with the loan the borrower would be approved for if theborrower were to originate the loan at the time the line size is reset.Line size growth can be implemented using periodic (for example, annual)resets based on the lender's prevailing interest rates and borrowerage-related actuarial calculations. The product can be set up so thatthe lender will never decrease line size. When any of these adjustmentsare made, the commitment amount and available funds are increasedaccordingly at block 138 and monitoring and maintenance continues atblock 130.

At block 142 of FIG. 1, a determination is made as to whether acondition of terminating the loan has occurred. If so, the loan wouldusually be terminated at block 144. If not, as shown by the feedbackarrow, monitoring and adjustment continues. In example embodiments, aproduct can have a number of associated termination triggers, whichdefine the conditions under which the loan becomes due and payable.Termination triggers can include, for example, the death of allborrowers on the contract, the sale of the home, the non-residence ofall borrowers for more than 12 months, non-compliance with contractconditions, and any other property change that affects title. Borrowerscan be contractually required to comply with a number of home upkeep andinsurance payment requirements in order to remain in good standing ontheir loans, or face termination. Violation of any of the maintenancerequirements can give the lender the right to initiate resolution (cure)or loan termination procedures against the borrower as detailed in theloan contract. If a borrower is found to be in breach of maintenancerequirements, the lender's principal goal may be to specify conditionsand deadlines that the borrower can meet or actions that the lender cantake on behalf of the borrower in order to come back into compliance andthus prevent termination. A product can be set up, however, so that thelender has the right to initiate loan termination procedures in casesspecified in the loan contract, subject to any applicable laws.

Blocks 146 and 148 of FIG. 1 are intended to describe a portabilityoption that can be included with an embodiment of the present invention.When a termination condition occurs that is connected withnon-residency, a move, or the like, a determination is made at block 146as to whether the portability feature can be used to transfer the equityrelease loan to another home. If so, the equity release line of credit,annuity, or other product is updated for the new property at block 148,and maintenance continues at block 130 as before. Portability can allowthe borrower to transfer the loan to a new property in the event thatthe borrower decides to move to another home. This feature reduces thedocumentation requirements and the need to re-apply for the loan if thenew property meets certain requirements that can be specified by thelender. Otherwise, such an event again results in termination at block144 as previously described.

FIG. 2 is a flowchart illustration of the operation of a simulationmodel according to example embodiments of the present invention, andFIG. 3 is a flowchart illustration of how to use such a model todetermine the LTV in example embodiments of the present invention. Theexample model projects cashflows and profitability measures based on aset of representative loans that serve as the sample “borrowers” for themodel. For each loan, the user specifies a variety of parameters,including borrower age and gender, house values, house location,utilization parameters (borrower's withdrawal frequency and amount) andloan options such as line increase method and equity protection. Notethat the model described with reference to FIG. 2 can be used with anyequity release loan regardless of how it is originated. It can be usedwith loans that are not the result of the conversion process discussedabove.

The example model runs each loan through a large number of jointinterest rate/house price scenarios. As time passes, cashflows and loanparameters are survivorship-adjusted. That is, if a termination rate of2% is expected in a given year, the cash flow quantities are scaled-downto reflect the reduction in surviving loans; termination-drivencashflows are linked to the rate of terminations. The example model thenoutputs all cashflows and operates on them to produce variousprofitability measures across the full distribution of scenarios.

To project realistic, best-estimate cashflows, the example model must becalibrated by a variety of market and borrower-related inputs. Interestrate assumptions are required to determine a baseline for the ratecharged on loan balances along each projected path. House pricescenarios are needed to determine the evolution of collateral value,which impacts the amount recovered from the loan. Costs are needed toreflect expenses incurred by the lender during loan origination,servicing and closing. In addition, the example model uses various inputtables, which generally specify termination rates across ages. Adescription of each of these inputs follows:

-   -   Interest rates: The example model imports a set of risk-neutral        interest rate scenarios that project treasury curves. Scenarios        are generated by a 1-factor Hull-White model, calibrated to the        market prices of a collection of interest rate derivatives and        swaptions. The data is read into the model from CSV files, each        of which contains a vector of rates across time for every        scenario. For example, a CSV file may contain a projection of        the 1-month rate over 30 years, recorded monthly, for each of        1000 scenarios. For the example model, a 1-month LIBOR rate upon        which the loan rate is based can be used. An alternative model        might use the 3-month treasury rate plus a spread for a prime        rate upon which the loan rate is based.    -   House price appreciation (HPA): In example embodiments MSA-level        HPA scenarios are generated using a lognormal model with serial        correlation and mean reversion. The house price appreciation        from time (t−1) to time t is given by:        log(HPA_(t) ^(MSA))=μ_(t)+ρ_(t) log(HPA_(t-1) ^(MSA))+α(τ−log        HP_(t-1) ^(MSA))+σ_(t)ε_(t), where    -   μ=mean log appreciation    -   ρ=serial correlation coefficient    -   α=strength of mean reversion    -   τ=target log house price    -   σ_(t)=volatility    -   ε_(t)=noise term    -   Parameters for the MSA-level HPA model in this example are        calibrated using a combination of forecasts and statistical        analysis of historical data. The model will weight forecasts        more heavily when calibrating parameters for earlier time        periods (i.e. the immediate future) and transition toward using        estimates based on historical regressions when calibrating        long-run parameter values. Scenarios for appreciation of an        individual house price x will cascade from the MSA-level        scenarios, as shown by:        HPA_(t) ^(x)=HPA_(t) ^(MSA) −D _(t)+σ_(t) ^(x)ε_(t)′, where    -   D_(t)=depreciation    -   σ_(t) ^(x)=specific volatility of the house within the MSA    -   ε_(t)′=noise term    -   Utilization: For example embodiments, a set of utilization        functions that describe typical borrower draw patterns observed        in comparable home equity products is used. In this embodiment,        the primary archetypes of draw patterns are a lump sum pattern,        a monthly disbursement draw pattern, and a combination draw        pattern. A lump sum pattern is one where the borrower withdraws        entire line up front. In a monthly disbursement draw pattern the        borrower withdraws a fixed amount per month. A combination draw        pattern is one in which the borrower withdraws a portion of the        line up front and then fixed amounts on a monthly basis.        Adjustments to the behavior specified in each archetype can be        applied to select borrowers to reflect borrower propensity to        behave differently under specific home value and interest rate        conditions.    -   Mortality: Actuarial mortality tables indicate the probability        that a person dies in the current year given his/her age. For        the example model, in addition to segmenting the tables by        gender, several types of tables corresponding to different types        of borrowers can be used. For example, a population table gives        mortality for the general population, a pension/annuity table is        built on the assumption that borrowers live longer than the        general population, partially because of their desire to take a        longevity bet, and a disability/morbidity table is directed to        characterizing the mortality of borrowers less healthy than the        general population. For the example model, the mortality tables        are applied at different weights across the utilization        archetypes to reflect the different mortality expectations for        borrowers who exhibit different draw patterns. For example, a        borrower who withdraws a lump sum in order to purchase an        annuity would be best described by the low-mortality        pension/annuity table because of the long-term horizon of        product usage.    -   Non-mortality terminations: Non-mortality based terminations can        be classified as either voluntary, where the termination follows        from home sale or move-out, and involuntary, where the        termination results from death or contract breach. The example        model imports tables containing estimates of borrower's        voluntary termination rates by loan year calibrated to data for        comparable products. In addition, the model imports tables        containing estimates of involuntary termination rates calibrated        against morbidity studies by the Society of Actuaries, as well        as data for comparable products.    -   Costs: Example embodiments of the model estimates of origination        and servicing expenses drawn from assumptions based on        experience. Additionally, the model of this embodiment estimates        property disposition costs based on estimates of costs derived        from analysis of actual experience in the first mortgage and        HELOC businesses.

Turning to FIG. 2, the various tables and inputs are set up as describedabove for process 200 beginning at block 202, where interest ratescenarios are determined. At block 204, a house price scenario isdetermined for each interest rate scenario. At block 206, a set of loansand their known parameters are selected for modeling. Each loan ismapped to a borrower type at block 208, and an appropriate mortalitytable is assigned for each borrower type as described above at block210. Finally, at block 212 all tables and inputs are imported into themodel algorithm to set up the model for execution. The remaining processblocks in FIG. 2 describe what is done for each period in each loan inevery scenario as nested “for-loops” as is known in the art.

Still referring to FIG. 2, for each period of each loan of eachscenario, within the loop limit beginning with block 214, house price isdetermined or updated based on current scenarios at block 216.Background parameters such as time variables are incrementedappropriately. A draw amount for the current period is determined by theutilization function at block 218. Loan balance data, including loanbalance, available-to-draw amount and fees/expenses is updated at block220. The available-to-draw amount is affected not only by the withdrawalamount, but also by the specified line increase method (includingincreases due to house price reassessment). At block 222, the rates ofmortality and other (voluntary and involuntary) terminations are derivedfrom the input tables and adjusted for model frequency. The rates arealso adjusted for concurrency, since only one termination event canoccur at a time; the total rate of termination is not simply the sum ofeach individual rate. A variable indicating the level of survivorship isthen decremented by the adjusted termination rates. Finally, at block224, cashflows specific to termination events are recorded on asurvivorship-adjusted basis, and processing returns to loop limit 214.Loan parameters are recorded both with and without survivorshipadjustments; the former is used to generate output on the same basis asthe cashflows, while the latter enables ongoing calculations on the samebasis as house prices and the utilization function.

Staying with FIG. 2, once all the above calculations have been carriedout for all the periods in a loan, the profitability for each loan iscalculated at block 226 within the loop limit shown at block 228. Looplimit block 230 denotes the loan and period processing being done foreach scenario, returning each time from return block 232. Finally,scenario profitability metrics are aggregated across all scenarios atblock 234 to produce the various outputs of the model. In this examplethese outputs are: shareholder value added, which is the mean netpresent value of economic profit, where economic profit is defined asaccounting net income less a cost-of-economic capital that reflectsshareholder performance expectations; return on assets, which is themean return on funds disbursed over the life of the loan; risk-adjustedreturn on capital, which is the mean return on economic capital over thelife of the loan; and economic embedded value, which is the presentvalue of loan cashflows discounted on a risk-free basis.

The model of the example embodiments outputs each of the aggregatedprofitability metrics outlined above as a portfolio aggregation and aloan level value. The former is the value of a portfolio of loans alongeach scenario, and the latter is the average value of an individual loanacross a full set of scenarios. Together, these outputs permit analysisboth of full portfolio profitability across individual economicscenarios as well as of the average profitability of individual loans.In addition, the net present value profitability measures can bedecomposed to reflect the profit or loss created during loan servicing,home sale and other activities. The model algorithm can also beimplemented to provide the option to produce detailed cashflow output,which lists all cashflows and loan parameters across time for selectedscenarios.

Market risk capital depends on interest rates and HPA. For interestrates, one can compute the difference between time 0 net present value(NPV) and the lesser of discounted time 1 NPV under shock-up andshock-down scenarios. For HPA, one can compute the difference betweentime 0 NPV and discounted time 1 NPV under shock down house price.Business risk capital depends on expenses, loan persistency(uncertainty), termination types, refinance risk, and utilization. As anexample, for expenses, one can assume 50% of the expected NPV ofservicing costs. For loan persistency, one can assume 80% and 125% ofthe baseline (expected) non-mortality termination rates. Terminationtype can be more heavily weighted towards the least profitable type oftermination. The refinance risk can be accounted for by increasing thenon-mortality termination rate to 500% of the best estimate in theupcoming 12 months followed by a return to the best estimate. Forutilization, one can simply re-weight utilization types more heavilytowards the least profitable. For operational risk, a typical financialinstitution's operational risk 014033-000150 framework can be used. Liferisk capital can be evaluated based on mortality level and mortalitytrend, both of which represent uncertainty. For mortality level, one canmultiply best estimate mortality rates by 80%, and for mortality trend,one can increase baseline improvement by 25%.

FIG. 3 illustrates an example process for using a model like thatdescribed above in determining an LTV ratio to use in granting an equityrelease loan. Process 300 of FIG. 3 begins when various parameters areset up for the algorithm to run. Note that the setup of FIG. 3 isindependent of the setup described with respect to the model itself asshown in FIG. 2. At block 302 of FIG. 3, the step-up amount, percentage,origination fee, rate margin, and ages to be modeled for setting the LTVare established. Most of the rest of process 300 is included in the forloop defined by loop limit block 304 in which the blocks of the loop areexecuted for each age to be modeled. Processing for this loop returnsfrom block 306. At block 308, an LTV range to test is established forthe age in the current run of the loop. At block 310 a composition ofborrower types to be tested is determined. The geographic distributionof the loans to be evaluated is determined at block 312. At block 314,sets of identical loans are generated, that is, identical except forgeographic location of the residences. Simulation model 200 is thenexecuted for the age that is currently being looped through. Thesimulation model of FIG. 2 is executed for each age being modeled to setthe LTV ratio as shown in FIG. 3. The execution of the simulation modelallows the establishment of value for the LTV ratio as shown at block316. In this example embodiment, this value is used as an upper limitthat is taken into account in the remaining calculations. Volumesensitivity to LTV ratio is estimated at block 318 and at block 320, theLTV that maximizes profit on average across all scenarios as determinedwith the aid of the simulation model is established.

Still referring to FIG. 3, once the profit maximizing LTV ratio and theupper limit on the LTV ratio are determined, the two LTV ratios arecompared at block 322. If the profit maximizing LTV ratio is greaterthan the upper limit ratio, the base LTV ratio is set to be the same asthe upper limit LTV ratio at block 324. Otherwise, the base LTV ratio isset to be the same as the profit maximizing ratio at block 326.Optionally, another for loop is nested within the “for each age” looppreviously discussed. For each geographic market as shown at loop limit328, a reduction factor is determined at block 330. This reductionfactor is designed to account for home values that are lower thanaverage in a particular geography. A geographic LTV ratio, LTV_(geog),is set by multiplying the base LTV by the reduction factor at block 332.The above described process including the for loop to adjust LTV ratiosby geography, is executed for each age to be modeled. Once all ages havebeen run, loan-to-value ratios for each age, for each geography, arestored for use in offering reverse mortgage loans. These loans caneither be original loans, or converted loans as previously described.

FIG. 4 illustrates a home value re-assessment process, 400, that can beused with some embodiments of the invention. The home valuere-assessment feature in example embodiments can allow the borrower'sline of credit to be increased periodically to reflect increases in thevalue of the home during the life of the loan. In some embodiments,borrowers can be offered two re-assessment options. Either the lenderautomatically initiates a re-assessment which recurs periodically fromthe date of origination (for example, every three years), or theborrower may request a re-assessment and may pay a contractually agreedre-assessment fee to the lender. In the former case, the borrower maynot be required to pay any re-assessment fees. Home value can bedetermined through third party sources (appraisal, etc.) and theborrower can be notified. In the latter case, the lender can obtain anestimate of home value and notify the borrower. Re-assessment isinitiated in FIG. 4 in either one of these two ways at block 402. Beforethe actual re-assessment can proceed, a determination is made at block404 as to whether the borrower is in good-standing on the loan. If not,the process stops at block 406. Otherwise, the home value is determinedat block 408. This determination could be made via an appraisal, byusing a formula that estimates home value increases, or in any otherfashion.

Still referring to FIG. 4, the new or “eligible” credit line based onthe new assessment is determined at block 410. The re-calculation of thecredit line can use the same methodology that the lender uses tocalculate borrower credit lines at origination and can be basedprimarily on the new appraised home value and the age of the borrowerson the date of the appraisal. The number and location of the borrowerscan also be taken into account, as shown by input block 412. At block414, if the new, eligible line is found to be lower than or unchangedfrom the previous line, the borrower's credit line remains unchanged,and the process stops at block 406. The product can be set up so thatthe borrower's line will never be decreased. If the home is appraised ata value higher than the previous appraisal, the eligible credit linewill be higher than the old line at block 414, and the new credit lineis presented to the borrower at block 416, so that the borrower mustexplicitly agree to switch to the increased credit line. If the borroweraccepts at block 418, the credit line is reset so that the new lineequals the eligible line at block 420. Otherwise, the process stops atblock 406. In a typical embodiment, if on re-assessment, the borrowerdisagrees with the appraised home value, the loan contract can detail aresolution process and the rights and obligations of all parties.

FIG. 5 illustrates another feature that can be used with embodiments ofthe invention in which a reverse mortgage is set up to provide a line ofcredit. This feature is referred to herein as a “draw limit step-up” oran “escalating draw limit” feature. Method 500 of FIG. 5 guarantees apositive available credit limit draw amount to the borrower at eachtrigger interval or increment over time independent of home priceappreciation, interest rates or previous line utilization. In theexample of FIG. 5, a step-up amount is determined at block 502 alongwith the initial line of credit (LOC) after a new application isinitiated at block 504. The new application can be a new reversemortgage application, or the result of a conversion as previouslydescribed. When reverse mortgage loan is closed at block 506, the lenderprovides the borrower(s) with a credit line based on a schedule of thedraw limit over time. The schedule specifies the maximum cumulative drawavailable to the borrower at any point in the loan's life. The schedulewill show an increasing draw limit at every point in the schedule (whichin this embodiment may be set monthly, quarterly, semi-annually orannually).

With the example step-up feature described herein, even if a customerhas taken the maximum draw in a given period, the customer will alwayshave additional funds available to draw in the following period.Different schedules may be applied to individual loans based upon loancharacteristics including but not limited to borrower age atorigination, borrower gender, property type, state of residence andnumber of borrowers on the loan.

Returning to FIG. 5, until a step-up is triggered at block 508, alldraws will reduce the customer's available credit line by the amount ofthe draw. At a point in time at block 508, the new credit line is set atblock 510 to the value of the old line, plus capitalized interest, plusthe step-up amount. Regardless of whether a step-up has occurred, whenthe customer draws on the account at block 512, the interest and balanceis calculated at block 514. The same calculation takes place if theborrower makes a payment at block 516. The customer's available creditline is calculated as the current guaranteed cumulative draw amount lessthe sum of all previous draws plus any principal repayments. Draws willaccrue interest in the same fashion as draws from an equity release lineof credit without the escalating draw limit. Additionally, wheneverinterest accrues at block 518, the line of credit is calculated to bethe old line minus the interest at block 520.

A step-up feature like that illustrated in FIG. 5 and be set up so thatthe draw limit can never be decreased. The lender may also provideincreases to the credit line and draw limit periodically at its owndiscretion. A product can be set up so that such increases will alwaysbenefit the customer by increasing both the current and future maximumcumulative draw available to the customer.

FIG. 6 illustrates a typical operating environment for embodiments ofthe present invention. System 600 can include a workstation or personalcomputer, 602 as an instruction execution or processing platform. Thesystem includes a fixed storage medium, illustrated graphically at 604,for storing programs and/or macros that make up computer program code,which enables the modeling algorithm and any other calculations that maybe used with an embodiment of the invention. In this particular example,an optical drive, 606, is connected to the computing platform forloading the appropriate computer program product into computer 602 froman optical disk, 608. Instruction execution platform 602 of FIG. 6 canexecute the appropriate instructions and display appropriate screens ondisplay device 612. These screens can include user input screens forentering various parameters, borrower information, and the like.

FIG. 6 also shows a connection to data stores, from which account data,forms, and other information can be retrieved, as needed. The connectionto the data stores or appropriate databases can be formed in part bynetwork 624, which can be an intranet, virtual private network (VPN)connection, local area network (LAN) connection, or any other type ofnetwork resources, including the Internet. Stored forms can be reside onfixed storage 626, account data can be stored in database 628, andtables regarding geography, age, gender, and the like used by the modelor otherwise used to set the LTV or for any other purpose can be storedin another data store on the network for example, data store 630. Thedata stores shown in FIG. 6 are examples only. Any or all of theinformation can be stored in various places, including instructionexecution platform 602.

The flowcharts and block diagrams in the figures illustrate thearchitecture, functionality, and operation of possible implementationsof systems, methods and computer program products according to variousembodiments of the present invention. In this regard, each block in theflowchart or block diagrams may represent an action or a portion of asystem, which comprises one or more actions, functions, or articles forimplementing the specified logical steps. These functions and/or logicalsteps may be implemented by people, computer program products, or acombination of the two. It should also be noted that, in somealternative implementations, the functions described herein may occur onan order different than the order presented or simultaneously. It shouldalso be noted that functions or steps and combination of functions orsteps described herein can be implemented by special purposehardware-based systems either alone or assisted operators which performspecified functions or acts.

The terminology used herein is for the purpose of describing particularembodiments only and is not intended to be limiting of the invention. Asused herein, the singular forms “a”, “an” and “the” are intended toinclude the plural forms as well, unless the context clearly indicatesotherwise. It will be further understood that the terms “comprises”and/or “comprising,” when used in this specification, specify thepresence of stated features, steps, operations, elements, and/orcomponents, but do not preclude the presence or addition of one or moreother features, steps, operations, elements, components, and/or groupsthereof.

Although specific embodiments have been illustrated and describedherein, those of ordinary skill in the art appreciate that anyarrangement which is calculated to achieve the same purpose may besubstituted for the specific embodiments shown and that the inventionhas other applications in other environments. This application isintended to cover any adaptations or variations of the presentinvention. The following claims are in no way intended to limit thescope of the invention to the specific embodiments described herein.

The invention claimed is:
 1. A computer program product comprising anon-transitory computer-readable medium including computer program codefor evaluating an equity release product, the computer program codefurther comprising: instructions for establishing representative reversemortgage loans, wherein each representative reverse mortgage loanprovides for a sample of a reverse mortgage loan and is characterized bya borrower type and a mortality table; instructions for determining aplurality of reverse mortgage loan scenarios, wherein each reversemortgage loan scenario is based on an interest rate and a house price;instructions for running each of the representative reverse mortgageloans through each of the reverse mortgage loan scenarios to measure aplurality of scenario profitability metrics for each of the reversemortgage loan scenarios, wherein each of the scenario profitabilitymetrics provide profitability for a corresponding reverse mortgage loanscenario; instructions for aggregating the plurality of scenarioprofitability metrics across all of the reverse mortgage loan scenariosto produce aggregated profitability metrics, wherein the aggregatedprofitability metrics provide an aggregated profitability across all ofthe plurality of reverse mortgage loan scenarios; and instructions fordetermining a portfolio profitability across all combinations of thereverse mortgage loan scenarios and representative reverse mortgageloans based on the aggregated profitability metrics.
 2. The computerprogram product of claim 1, wherein the instructions running each of theplurality of representative reverse mortgage loans through each of thereverse mortgage loan scenarios further comprise: instructions fordetermining a home price; instructions for determining a draw amount;instructions for determining a rate of termination for therepresentative reverse mortgage loan; and instructions for calculating adistribution for the representative reverse mortgage loan.
 3. Thecomputer program product of claim 1, wherein the computer program codefurther comprises instructions for establishing a value for a firstloan-to-value (LTV) ratio for the reverse mortgage loan.
 4. The computerprogram product of claim 3 wherein the instructions for establishing ofthe value further comprise instructions for establishing the value foreach of a plurality of borrower ages.
 5. The computer program product ofclaim 3, the computer program code further comprising: instructions fordetermining a loan volume sensitivity; instructions for establishing asecond LTV ratio, wherein the second LTV ratio maximizes profit onaverage across all of the plurality of reverse mortgage loan scenarios;and instructions for setting the first LTV ratio for the equity releaseproduct to be the lesser of the second LTV ratio and the value.
 6. Thecomputer program product of claim 5, wherein the computer program codefurther comprises instructions for adjusting the first LTV ratio for theequity release product based on a geographic market.
 7. The computerprogram product of claim 4, the computer program code furthercomprising: instructions for determining a loan volume sensitivity;instructions for establishing a second LTV ratio, wherein the second LTVratio maximizes profit on average across all of the plurality of reversemortgage loan scenarios; and instructions for setting the first LTVratio for the equity release product to be the lesser of the second LTVratio and the value.
 8. The computer program product of claim 7, whereinthe computer program code further comprises instructions for adjustingthe first LTV ratio for the equity release product based on a geographicmarket.
 9. The computer program product of claim 4, the instructions forrunning each of the plurality of representative reverse mortgage loansthrough each of the reverse mortgage loan scenarios further comprising:instructions for determining a home price; instructions for determininga draw amount; instructions for determining a rate of termination forthe representative reverse mortgage loan; and instructions forcalculating a distribution for the representative reverse mortgage loan.10. The computer program product of claim 5, the instructions forrunning each of the plurality of representative reverse mortgage loansthrough each of the reverse mortgage loan scenarios further comprising:instructions for determining a home price; instructions for determininga draw amount; instructions for determining a rate of termination forthe representative reverse mortgage loan; and instructions forcalculating a distribution for the representative reverse mortgage loan.